Replux Electronics, Part $1$

Replux Electronics is a mid$-$sized electronics manufacturer headquartered in Kuala Lumpur,

Malaysia. The company's president, Alan Ooi, inherited the business founded over seven decades

ago. Initially, the company focused on repairing radios and other household appliances. However,

over the years, Replux expanded its operations into manufacturing and has since established itself

as a reputable producer of various electronic items. Jay Chou, a recent MBA graduate, has been

hired to join the company's finance department.

One of Replux's major revenue$-$generating products is a personal digital assistant $($PDA$).$

Currently, the company has a single PDA model on the market, which has been performing

exceptionally well in terms of sales. This unique PDA stands out with its vibrant tropical color

options and its ability to play Jimmy Buffett music. However, like any electronic device,

technology evolves rapidly, and the current PDA model has limited features compared to newer

offerings. Recognizing this, Replux invested RM$750,000$ to develop a prototype for a new PDA

that incorporates all the features of the existing model while adding innovative capabilities such

as cell phone functionality. The company further invested RM$200,000$ in a marketing study to

determine the expected sales figures for the new PDA.

Replux can manufacture the new PDA at a variable cost of RM$155$ per unit. The fixed

costs for the operation are estimated to be RM$4\mathrm{.}7$ million per year. The estimated sales volume

for the new PDA is projected to be $74,000,95,000,125,000,105,000,$ and $80,000$ units for the

next five years, respectively. The unit price of the new PDA will be RM$360.$ The necessary

equipment required for production can be purchased for RM$21\mathrm{.}5$ million and will be depreciated

over a seven$-$year MACRS schedule. It is believed that the equipment's value after five years

will be RM$4\mathrm{.}1$ million. $($Depreciated using straight$-$line method over a useful life of $5$ years$)$

Currently, Replux manufactures a PDA model, but production of this existing model is

expected to be terminated in two years. If the company does not introduce the new PDA, sales

for the existing model are projected to be $80,000$ units and $60,000$ units for the next two years,

respectively. The price of the existing PDA is RM$290$ per unit, with variable costs of RM$120$ per

unit and fixed costs of RM$1,800,000$ per year. However, if Replux introduces the new PDA, sales

of the existing model will decrease by $15,000$ units per year, and the price of the existing units

will need to be lowered to RM$255$ each. Net working capital for the PDAs will be $20$ percent of

sales and will occur in sync with the timing of the cash flows for the year; for example, there is

no initial outlay for net working capital, but changes in net working capital will first occur in year

$1$ with the first year's sales. Replux has a corporate tax rate of $35$ percent and a required return

of $12$ percent.

Alan has asked Jay to prepare a report that answers the following questions:

What is the payback period of the project?

What is the profitability of the project?

What is the IRR of the project?

What is the NPV of the project?